How Does a Young Person Obtain a Mortgage?

Are you looking to purchase a new home in the near future? Are you confused about the whole mortgage and financing process?

Don’t worry guys. Applying for a mortgage can be a very nerve-wrecking process. All of the industry jargon, paperwork, countless signatures, and hours spent waiting, can really bring one down on the whole process. Fortunately, you’re not alone!

Today let’s address the colossal question: what do I need to get approved for a mortgage?

Exceptional credit score.

I’ve discussed the importance of a credit score many times here. Now it really comes into play. The higher over 720 that you’re credit score is, the better the interest rates will be. Why does this matter so much?

Let’s put it into perspective and run a little calculation:

Think about the difference that an interest rate of 6.5% compared to 5.5% will make on $300,000? Let’s just say you save up $50,000 for your down payment, bringing the total amount you need to mortgage to $250,000. At a interest rate of 5.5% you will spend $63,273.46 on interest in he first 5 years of the mortgage.

Now let’s say your credit score is average and you get a higher interest rate of 6.5%. In the first 5 years you will spend $74,961.02 on interest. Ouch.

If you have an exceptional credit score (over 720) and you’re able to secure an interest rate that is 1% lower, you can save $11,687.56 on interest in the first 5 years of your mortgagee alone.

(Thanks to the mortgage calculator at CanEquity for this calculator. This is assuming a 5-year fixed mortgage, paid bi-weekly, amortized over 25 years. The interest rate numbers are simply just arbitrary numbers from the top of my head.)

Steady work.

The lenders need to be very certain that you’ll be able to make your mortgage payments. The lender will want to see proof that you have steady employment. They will usually want to see how much income you earned in the previous tax year and some of your most recent paychecks.

Part-time work doesn’t usually cut it for most lenders. The fluctuation in income usually makes you too risky of a borrower.

For the entrepreneurs of the bunch– you might require a little bit more paperwork. Lenders will often ask you to prove your income a bit further. You may be asked to bring in tax returns from the past few years. I’ve had various self-employed readers and friends tell me that the mortgage approval process dragged on for them. Just a heads up.

Solid mortgage down payment.

After the credit crunch of late-2008, it’s highly unlikely that your mortgage application will get approved with anything less than 10%. The general rule of thumb is that you should strive to save up for a down payment of 20-25% for your first home purchase.

Your credit score will determine how credit worthy you are, your employment will determine how likely you are to make your mortgage payments– but your mortgage down payment will determine if now is the right time for you to be purchasing a home.

Savings.

The lender wants to see that the home purchase won’t obliterate your savings/available assets. The lender will be more comfortable with loaning you money if you have some savings in the bank and some assets to your name. This just means that you’ll temporarily be able to pay your mortgage payments if you happen to lose your job or be in between jobs.

Has anyone recently gone through this process? Any experiences that you want to share with us?

Types of Mortgages.

The most common type of mortgage is the conventional loan. If you have a down payment of at least 10% and meet all the above requirements these loans usually cost the least and will give you the best interest rates. 

Most people start off with an FHA loan that is more designed for first home buyers or people who don't meet all the above requirements. FHA loan amounts vary by state but they do not require as much for a down payment and are easier to qualify for. 

If you are in the military or have been in the military you should consider a VA Loan which is subsidized by the Federal government as a thank you for your or a family members service. 


2 thoughts on “How Does a Young Person Obtain a Mortgage?”

  1. Just went through this process last year.

    My lender required two years of employment history with the same company. They are also interested to see what line of work you’re in. Don’t be surprised if you get denied based upon being in a very cyclical industry.

  2. I bought my house a long time ago, way back in ’96. But, the economc conditions were similar to 2010 in that it was very hard to get a mortgage. I was very luck that I had good credit and a stable work history. Otherwise, I might not have gotten the great house I still live in.

Leave a Comment

Your email address will not be published. Required fields are marked *